As a reflection of the current economic climate, in the second quarter of 2013 there were 3,978 compulsory liquidations and creditors’ voluntary liquidations in England  and Wales added to which 1,315 people per day reported becoming redundant. This highlights customer solvency as a serious risk to maintaining a healthy business, especially those engaged in providing high value services, such as aircraft maintenance repair organisations (MROs).

A common method to protect against such credit risks is to retain possession of an aircraft or spare parts, frequently in the exercise of a lien. However, this is a passive remedy and can cause expensive storage problems, especially where the owner proves absent or recalcitrant. Without ownership rights, a difficult question arises as to how to control mounting expense and ultimately how to dispose of the items. This article reviews the nature of that possession and an option that has rarely been considered – using the Torts (Interference with Goods) Act 1977 to seek to obtain  an order for sale.

Why is possession a problem? – bailment and liens

A bailment is a legal relationship related to physical possession of property. It arises where one party (the bailee) voluntarily takes custody of goods belonging to another (the bailor). The bailee/bailor relationship creates independent rights and obligations – so, for example,  need not depend upon other legal relationships such as a contract. One of the significant obligations imposed upon the bailee is a requirement to take reasonable care of the goods. Surprisingly, there is very little English case law providing guidance as to how that obligation should be discharged, which will depend upon the circumstances of each case. It is submitted that the bailee is not obliged to take every conceivable precaution to prevent loss or damage but that the obligation requires taking such care  of bailment property that a person would take in respect of their own property.

A person – a lienholder or lienee – who retains property belonging to another – the lienor – against a claim for payment generally asserts a lien. A lien provides a legal right to hold the property of another as security for the performance of an obligation, such as in this example, payment of a debt. These rights are generally unassignable and take precedence over other security interests, such as a mortgage over an aircraft. There are several types of lien. One arising by operation of law, a “possessory lien”, is determined by restrictive pre-requisites; in the context of aircraft, asserting such a lien requires possession of it where work, authorised by the owner, has been completed and improves it (ie, there is no lien for pure maintenance). A broader power can be agreed contractually and can therefore remove, for example, the requirement for improvement.

At common law, a lien only provides for a passive right to possession, which gives rise to a bailment relationship, under which preservation of an aircraft requires regular checks and special care if, for example, the aircraft is stored outside.

This raises the question whether the service provider can recover expenses incurred while a dispute unfolds. The traditional position of English law is to deny any claim for expenses incurred for benefits conferred on others, such as for work and labour in preserving the property of another person. However, a relatively recent shipping decision of  the Supreme Court in Petroleo Brasileiro S.A. v E.N.E. Kos 1 Limited recognises that exceptions to that rule have become more important than the rule itself. The case concerned  the ship owner’s right to withdraw the vessel for non- payment of hire charges and then to claim for the resulting expenses incurred whilst awaiting discharge of the cargo  by the charterer. The bailment initially arose by consent  but continued once the ship had been withdrawn from the charter. The Court recognised that the ship owner could not escape the continuing duty to take reasonable care of the cargo and unanimously held that the owners could recover their expenses under the law of bailment.

1977 Act

Except as otherwise specifically provided by contract, the effect of a lien is limited, specifically it does not confer on the lienholder a power of sale. However, since a lienholder will have possession of the lienee’s property, there will be a bailment relationship. This gives rise to the potential for exploiting the provisions of the Torts (Interference with Goods) Act 1977, under which the issue is whether the provisions relating to “uncollected goods” can apply while the lien operates to prevent collection unless the underlying debt is satisfied.

In dealing with “uncollected goods”, the Act provides a bailee with a statutory power of sale in a variety of circumstances where a bailor is in breach of an obligation to take delivery of the goods (or has failed to respond to a notice to take delivery) and, for example, because the bailor is untraceable or has ceased to exist. A bailee exercising powers of sale under the Act gives a good title to the purchaser as against the bailor but will be liable to account to the bailor for the proceeds of sale (less any costs of sale).

These provisions would adequately assist a bailee in a scenario where the owner of an aircraft had disappeared. However, a bailor who disputes liability to pay a debt will simultaneously assert that he is not in breach of an obligation to take delivery. In this case, relief for the bailee/ lienholder is provided through a somewhat complicated procedure where sale can only be authorised by a court. The bailee must apply to the High Court and show an entitlement to sell the property, or that he would be so entitled if he had given any required notice.

While there is very little case authority on this aspect of the 1977 Act, an unreported Court of Appeal case, Irving v Keen [1995], does provide some guidance. The case involved a car sent for repair, the bill for which came to GBP 900 sterling; the owner refused to pay and so the car was retained at the defendant’s premises. The defendant wrote to the claimant threatening to sell but in a manner and form that did not comply with the prescribed form of notice required by the 1977 Act. He did not sell the car at that time but, years later, sold the engine and was eventually successfully sued for  the tort of conversion – ie dealing with the car as though it was his own.

In the Court of Appeal Stuart-Smith LJ said:

“It seems to me that the defendant’s mistake in this case was in not serving a proper notice under the 1977 Act and, having done so, in not selling the car. He was fully entitled to retain the car, exercising his lien until the GBP 900 was paid by the plaintiff. He was not entitled, having not complied with the Act, to sell parts of it, or to sell any of it. His obligation was to maintain it and exercise reasonable care with it, and not allow it to become a complete write-off, so that it was no longer a car which could be repaired but just scrap; and that is what he failed to do.”

The clear implication is that the repairer exercising his lien can still serve a valid notice requiring collection with payment. So, the exercise of the lien does not prevent an application under Act, but proper procedure must be followed for a successful application.

Discussion

As the Supreme Court noted in Petroleo Brasileiro S.A. v E.N.E. Kos 1 Limited, many civil law systems already provide a cause of action to recover benefits conferred on others. So, while the development of English law to permit the recovery of charges incurred in providing the required  care is certainly not novel, it does reflect a common sense position that will be welcomed by bailees. Bailors will now have to bear in mind that leaving their property in someone else’s possession is not free of financial consequence. It is worth highlighting, as a practical matter, that the burden to prove what comprises reasonable care falls on the bailee and so careful attention to documenting whatever action is taken will be necessary.

Not just as a matter of law, it makes sense that a person in possession of property cannot decide unanimously to use the proceeds of selling it to offset against a debt owed. There has not been a reported case where a lienholder in a debt dispute has obtained an order for sale of an aircraft. However, it is not difficult to imagine circumstances where a court might be inclined to grant such an order, especially where the value of an aircraft diminished over time (eg, for not having been flown or for not having periodic maintenance carried out) as the dispute unfolds. Let alone the legal novelty, there are practical consequences of choosing to seek an order for sale, such as the prospect of finding a buyer and whether the price that might be obtained offers sufficient value against the debt. Nonetheless, the fact that seeking such an order is an option means that those engaged in providing high value services to improve an aircraft can proactively put extra pressure on a debtor to resolve the dispute, rather than simply waiting for a payment to materialise.